A late addition to the $1.9 trillion stimulus package exempted the first $10,200 of 2020 unemployment compensation from federal income tax for households earning less than $150,000 a year. The exemption was “a big deal because we were anxious about the surprise tax bills that people were bracing for,” Andrew Stettner, a Senior Fellow at Century Foundation, told me. However, not all states have extended the same tax break as the federal government, which means that residents may face higher state taxes than they were expecting. As of March 29, 13 states have not conformed with the federal unemployment tax break, according to recent data from H&R Block. These states are requiring residents to pay taxes on unemployment compensation, which could create surprise tax headaches for Americans. “As we head into tax filing season, millions of families will be in for a rude awakening when they discover they are on the hook for thousands of dollars in owed income taxes at the federal and, in some cases, the state level,” said Elizabeth Pancotti, Policy Director at Employ American, a left leaning think tank. The 13 states currently not waving taxes on unemployment compensation are:Some states either do not levy a personal state income tax, like Florida, or have historically not taxed unemployment benefits, like Alabama. 14 other states have adopted rules to conform to the federal exemption of $10,200. These states are Connecticut, Iowa, Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, North Dakota, Nebraska, New Mexico, Oklahoma, Oregon and Utah (Washington D. C. also conforms). H&R Block notes that three states - Arizona, Ohio, and Vermont - have not officially adopted the $10,200 exemption, but are implementing the change or will soon do so administratively. In those states, taxpayers have been advised to claim the exemption when they file state taxes. Over $580 billion in unemployment insurance benefits was paid out in 2020 to roughly 40 million Americans. While state tax rates are typically lower than federal ones, the liability could still be substantial. With nearly two-thirds of Americans living paycheck to paycheck since the pandemic started, the sad reality is that most may not have access to the necessary funds to pay their state tax liability. Taxing unemployment insurance is a “policy choice [that] hurts lower-earning households, who have more difficulty making large one-time tax payments,” Pancotti and Brian Galle argued in a Century Foundation report. Take New York State, where state tax rates range from 4 percent to 8.82 percent. Someone with $150,000 in taxable income would be paying a marginal state tax rate of 6.41 percent. Without an exemption, someone who received $10,200 in unemployment compensation as part of their taxable income would be forced to pay an incremental $653 in state taxes. The impact is worse in Hawaii where state tax rates go as high as 11 percent.


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